You may be quite happy with the benefits you have through your employer. Although health insurance is probably your primary concern, other benefits are important too. Employer-sponsored (group) life insurance can be a nice benefit, but it can also be somewhat misleading. In this article, we look at the pros and cons of group life insurance. You will learn what mistakes to avoid. One of the mistakes could be a major one.
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Source: 2014 Insurance Barometer Study, Life Happens and LIMRA
Usually, we start with the “pros” when listing the pros and cons on a subject. However, in this article, we’ll jump right into the negatives. Later, we will discuss the benefits of group life insurance.
Problem #1: Underinsured
As you can see in the graphic above, one in four people thinks that group life insurance is “enough”. First off, the amount of coverage offered through a group plan varies considerably. Sometimes, the maximum is $50,000. Other times, the maximum is 5 times your annual income. However, it’s common to have twice your income. It’s not uncommon to have $25,000 or $50,000.
Keep in mind, 1 in 4 families believe group insurance from an employer is enough. If you are single and don’t have children, then a small policy through your group plan should suffice. If you have a spouse or children who depend on your income, then you need to consider these negative points.
Most people need approximately 10 times their annual income in life insurance. Although we don’t think the rule of thumb applies to everyone, it shows that 2 times or 5 times your income is clearly not enough. If you rely on your group life insurance, you are usually underinsured.
Problem #2: You don’t own the policy
This can be quite serious. Even if the coverage you have through the group plan is adequate, you don’t own the policy. If you are laid off or change jobs and your next employer doesn’t offer decent life insurance, this could be problematic.
If you are healthy and qualify for an individual policy, this really isn’t a problem. However, if you developed a health condition, then you could be declined or pay much more than you would have if you applied when you were younger and healthier.
Let’s say you want to start your own business and you have a condition such as arthritis or diabetes. You realize that the cost of individual life insurance is very high due to your health condition. This could affect your decision to start your own business or work with a start-up.
Problem #3: Age Banded, Non-Guaranteed Rates
Typically, rates for group life plans are age banded. So, rates increase every 5 years. The premiums can be quite affordable when you are young. However, if you need coverage for an extended period of time, then rates can become unaffordable. Don’t make the mistake of thinking your rates are quite low and you don’t need to shop elsewhere.
As you get older, life insurance becomes more expensive and you’re more likely to experience health issues. Once you hit a new age bracket in your 40s or 50s, you might be shocked by the rate increase. Below are rates for a group plan offered by Humana:
- Incremental flat benefit $1,000 increments
- Minimum amount $15,000
- Maximum amount $50,000
- Guarantee issue up to $50,000
- Waiver of premium to age 65
Age reduction Age Schedule 65 – 69 benefit amount reduces by35%; 70+ benefit amount reduces by 50%
Cost Shown Below is per $1000 of Coverage per Month
- 18 – 29 $0.07
- 30 – 34 $0.08
- 35 – 39 $0.10
- 40 – 44 $0.15
- 45 – 49 $0.24
- 50 – 54 $0.38
- 55 – 59 $0.60
- 60 – 64 $0.84
- 65 – 69 $1.39
- 70 – 74 $2.71
- 75 – 79 $5.22
So, if you purchase a $50,000 policy at age 43, the rate is only $7.50 per month. When you turn 45, the rate jumps to $12 per month. Let’s say you need coverage for 20 years. At age 60, your premium rockets to $42 per month – for just $50,000. Unless you are in poor health or uninsurable, you’re almost always better off buying a low-cost individual life policy.
Additionally, these numbers don’t take into account the fact that rates are usually not guaranteed beyond 2 or 3 years.
Problem #4: The Death Benefit is Taxable.
This relates to Problem #1: Underinsured. When you factor in your tax rate, your death benefit could be slashed by over 25%. Most people don’t consider this. Individual policies are paid with after-tax dollars, but the benefit is NOT taxable.
The Benefits of Group Life Insurance
This article has hit mainly on the negative aspects of group life insurance. There are some positives, too.
1. Young, Single, and no Dependents
Most young employees with no dependents are very unlikely to buy life insurance. If they die, then the burden to pay final expenses usually falls on parents. A $15,000 group policy would pay for these expenses.
2. Age Banded Rates
Yes, this was listed as a negative aspect of group life insurance. It certainly can be. However, for many people in their 20s and 30s starting a family, this is a good deal. The fairly low-cost of group insurance can be a nice supplement to an individual policy. With some employers, group life insurance is free or a minimal cost (for a small amount of coverage).
3. Payroll Deduction
Even though the benefit is taxable, the premium for group life insurance is automatic. Especially when paid every pay period (oftentimes bi-weekly), it is painless to pay just a few dollars every two weeks. Some people who are unwilling to buy adequate individual coverage, at least have this life insurance. Payroll deduction helps make this easier on some folks.
4. Good for people who can’t qualify for individual policy due to health
If you have a serious health condition and can’t qualify for an individual policy, then a group policy might be your only option. There is no exam or underwriting. Your approval is guaranteed. If this is the case, it’s best to purchase the maximum available without medical underwriting. This can be a huge benefit for some people. Likewise, if you have a health condition that could cause you to pay much more than the Standard premiums, then a group life plan could be a better option. It’s important to get medically underwritten rates and compare.
Pros and Cons of Group Life Insurance through Work – Conclusion
We have demonstrated that relying solely on group life insurance is usually not a good idea. If you have loved ones depending on your income, then your group life insurance might provide a false sense of security. If you’re in good health, it would be best to get quotes for a low-cost term policy.
Even if your health isn’t the best, it makes sense to look at your options. In the short run, a group plan might look better. However, you need to look ahead at future costs. Additionally, it’s wise to consider the possibility of losing your job and losing your group coverage.
Even if you work for the government and have a very stable career, it’s good to look at the “what ifs”. What if you became disabled? Sure, you would have disability insurance, but what happens to your life insurance? You would lose it. What if you died shortly after you became disabled? Again, these scenarios are unlikely to occur, but important to consider.
If you need help comparing your options, please call us for a free, no obligation consultation.